Recently I purchased shares in beaten-up telecom Vocus Group Ltd (ASX: VOC), making it approximately 3% of my portfolio. Should current prices persist, I’ll likely buy more in the next couple of weeks.
Rather than dwell on how the company got to this stage (you can find a summary here and here), I’ll focus on what I perceive to be the company’s main issues and why I think it is an opportunity today:
- Growing market share in both NBN and New Zealand’s UFB (ultra-fast broadband) networks; a competitive area but Vocus is successfully growing its piece of the pie
- Other growth areas including Australia-Singapore Cable (ASC), energy, mobile, and increasing penetration of services in the corporate market (e.g. backup services via Vocus’ data centres)
- Synergies yet to be fully achieved from acquired businesses
- A low price providing substantial margin for error
- Prospect of attractive future dividends once current issues are worked out
- Debt burden a concern especially if earnings take another downgrade; Vocus has several levers to pull to lighten debt though, including cutting dividend and possible sale of data centres
- Possible more ‘cockroaches in the kitchen’ esp. with Nextgen acquisition reportedly underperforming already, and two recent downgrades
- Possibility for continued difficulty, increased expense, and delays integrating systems across its acquisitions
- Possible technological obsolescence; I am not a techie but over the past 20 years it has not paid to bet against changes in the way we connect and use data
- Possible rumoured private equity buyout; Vocus shareholders appear to have capitulated, but if private equity swooped in and bought the company at a premium to recent prices, it would be a win for them and not for shareholders
In my opinion, Vocus looks cheap with attractive long-term assets (its cables have an estimated ~20 year lifespan), and is growing its market share in a market that is itself growing at a reasonable pace. While competitive and financial concerns are real, I think that they have been overstated – teething pains, not smallpox.
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Motley Fool contributor Sean O'Neill owns shares of Vocus Communications Limited. The Motley Fool Australia owns shares of Vocus Communications Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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